Overview

? OPR maintained as expected. The Monetary Policy Committee (MPC) held the OPR at 3.00% at its final meeting of the year, in line with the unanimous Bloomberg consensus survey of 22 respondents (including the house).

? Sanguine economic outlook. The MPC foresees strong growth both from domestic and external demand supporting Malaysia’s growth and struck an upbeat tone on the 2018 prospects for the domestic and global economy.

? Cautious on inflation. The MPC attributed higher headline inflation to dearer global oil prices, flowing into domestic retail prices. It expects inflation to be at the upper end of the forecast range at around 4.0% with core inflation sustained by robust domestic demand.

? Stable financial markets. The MPC views the financial markets, ringgit strength and banking system liquidity as reflective of financial system stability, with its assessment essentially unchanged from its September’s meeting.

? Hawkish overtones. December’s Monetary Policy Statement (MPS) conspicuously dropped any mention of core inflation remaining contained while also hinting at a review on the degree of existing monetary accommodativeness in view of a strengthened economy. As far as rules of thumb goes, if 1H18 growth is sustained above 5.0% while core inflation continues to see upward pressure, we expect this to support the MPC’s case for a 25bp OPR hike to 3.25%.

OPR maintained at 3.00%. The Monetary Policy Committee (MPC) held the OPR at 3.00% at its final meeting of the year on Thursday. This is in line with the unanimous Bloomberg consensus survey of 22 respondents (including the house expectation). With the next monetary policy meeting pencilled at 24-25 January 2018, November’s announcement places the OPR at 3.00% for at least 19 consecutive months; the MPC last cut the OPR during its July 2016 meeting from (to 3.00% from 3.25%), citing growth concerns.

Entrenched synchronous growth. The Monetary Policy Statement (MPS) reiterated its September’s view of a more “entrenched and synchronised” global growth, further noting a pickup in global trade. It further notes diminishing economic slack among advanced market economies (AMEs). Closer to home, the MPC maintained its view of steady domestic and external demand, also noting relatively calm financial markets. While it continues to note geopolitical and policy risks among major economies, the MPS language suggests that it is more sanguine on economic prospects. The MPC is somewhat upbeat on its assessment for the global economy in 2018, projecting economic prospects to remain favourable.

Strong domestic growth amidst external support. Likely encouraged by strong 1H17 growth of 5.7% (2H16: 4.4%), the MPC noted strong growth both from domestic and external demand supporting Malaysia’s growth. The MPC singles out private consumption as the largest growth driver, picking up from its previous MPS theme of improving income and labour market conditions. On investments, the MPC continues to see sustained infrastructure projects and capital investments in the manufacturing and service sector driving growth. It further noted stronger spillover from the external sector serving as an additional catalyst for growth. As with the global economy, the MPC is likewise upbeat on the 2018 prospects for the domestic economy.

Spotlight on inflation. With inflation edging up again (Sep: 4.3% v Jul: 3.2% where the MPC last convened), the MPC again attributed this to fluctuations in oil prices. However, while September’s MPS traced lower inflation to decline in domestic fuel prices, November’s MPS attributed higher headline inflation to dearer global oil prices arising from disruptions in supply, likely a reference to hurricane-related disruptions in the US and hinting at ongoing geopolitical tensions in the Middle East. The MPC hence expects inflation to be at the upper end of the forecast range (its last annual report initially projected inflation to range 3.0-4.0%). While the MPS noted that core inflation will continue to be sustained by robust domestic demand though in contrast to September’s statement, November’s statement declined to note that underlying inflation is “expected to remain contained”.

Conducive financial markets. The MPC’s assessment of the domestic financial markets is practically verbatim as the September’s MPS, describing financial markets as “resilient”, ringgit as strengthening closer to fundamentals, banking system liquidity as “sufficient” as well as “sustained and supportive” of growth of financing to the private sector.

Outlook

A more sanguine outlook. The MPC’s assessment of the domestic and global economy is largely in line with the views presented by the Ministry of Finance in its 2018 Budget. This is likely grounded in their assessment of strong 1H17 GDP growth and strong economic data flowing domestically and globally. The MPC’s more upbeat sentiment is also in line with many other major global central banks, positing a sanguine economic outlook. Also, notable in the MPS, its wording adopted a more benign view of global risks, implying that economic prospects are likely to be biased on the upside.

A hawkish bias. December’s MPS conspicuously dropped any mention of core inflation remaining contained while also noting, “....Given the strength of the global and domestic macroeconomic conditions, the MPC may consider reviewing the current degree of monetary accommodation”. This is MPC’s most hawkish statement yet and may be BNM’s earliest official statement communicating possible tightening down the road. However, we note that while hawkish, the MPC’s language sought to keep its options open but simply considered a “review(ing) of current degree of monetary accommodation”. It made no mention of any timetable or any specific economic variables of interest, though we suspect that any further elevation of core inflation and sustained growth in 2018 (at least close to the 5.2% MoF growth target) will likely trigger a 25bp hike in the OPR to 3.25%. On the flip side and using MoF’s projections as a watermark, expect deterioration in 2018 manufacturing and service sector growth significantly below MoF’s 5.3% and 5.8% respective target to reduce the case for a rate hike. Given the house view of a 4.9% growth target for 2018 instead, we believe that the timing that MPC will likely consider its first rate hike is in 2H18 as it awaits confirmation of sustained growth trajectory at least for 1H18.

More cautious on inflation. In addition to its assessment on underlying inflation (as driven by domestic demand), the MPS noted higher inflation since its last meeting, noting higher global oil prices. It indicated that headline inflation for 2017 is likely to trend at the upper end of its forecast, suggesting inflation of around 4.0% (Kenanga 2017 inflation: 4.1%). While the MPS projected headline inflation to moderate in 2018 subject to smaller effect from global cost factors, it was quick to point out uncertainties arising from future development of global oil prices as a factor that may change its inflation outlook.

Source: Kenanga Research - 10 Nov 2017